Medicaid cuts force hospitals onto auction block

Struggling economy squeezes health-care providers, forces mergers

LOS ANGELES (MarketWatch) — In Tennessee, a state where health care is king, hospital operator Catholic Health Partners has found that it can’t do business there anymore.

Tennessee is home to such giant hospital chains as HCA Holdings
HCA, -1.23%
, Community Health Systems
CYH, +0.00%
and LifePoint Hospitals
LPNT, -1.16%
But aggressive Medicaid cuts by state politicians are eating into the bottom line at six Catholic Health Partners medical centers in Knoxville. So it’s selling the group of hospitals, says James Gravell, Cincinnati-based Catholic’s chief financial officer.

Catholic’s net margin already stands at a tenuous 2% to 2.5%, leaving little wiggle room, Gravell says. Most of its hospitals are centered in Ohio and serve such depressed Rust Belt cities as Youngstown and Toledo. Low Medicaid reimbursements already put a crimp in profits; its hospitals won’t make back costs on roughly 22% of its patients on average, and up to 30% in regions such as Toledo.

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“When you’re a business and you see that, it’s a real challenge,” Gravell said. “We were not making money in Tennessee. We were losing money.”

Stories similar to Catholic’s are cropping up throughout the nation, and could lead to a drastic makeover for the hospital business landscape. Many small operators are fleeing for the exits and getting absorbed by bigger, more resilient chains.

In turn, the larger, more risk-averse facilities are substituting for the homegrown community hospital.

Cutbacks in federal reimbursements on Medicaid programs initiated in recent years are hitting nonprofits like Catholic Health Partners the hardest, especially community hospital companies that operate only one or two facilities and can’t spread out the risk.

Cuts in federal matching dollars

States such as Georgia are seeing massive reductions in federal matching funds. Other states like California — which face massive budget shortfalls year in and year out — or others especially troubled in a down economy have cut back on their Medicaid reimbursements.

There are 23 states over budget on Medicaid. And in 13 states, Medicaid budgets are being slashed. Those states are: Colorado, Connecticut, Florida, Nebraska, New Hampshire, New York, North Carolina, Oregon, Pennsylvania, South Carolina, Texas, Virginia and Washington.

Moody’s Investors Service recently issued a study examining the issues for nonprofit hospitals. It says Medicaid funding pressures could put stress on hospital credit ratings for at least the next several years.

“We do see an increasing trend in M&A activity,” said Lisa Martin, Moody’s senior vice president and analyst. It isn’t just troubled hospitals that seek partners, she adds. Healthy facilities with an eye toward possible trouble on the horizon are on the prowl for prospective mates as well.

Relief may come from the 2009 Affordable Care Act, when coverage is expected to extend to indigent patients who have up to now been uninsured. That should help cut down on what is known as “bad debt” for many hospitals, or the cost to treat charity cases.

But those provisions won’t take effect until after 2013, leaving a funding chasm for many hospitals. Plus, there is no guarantee that the ACA will cure hospitals’ Medicaid ills. So many are taking refuge.

“I think it’s starting to drain on people,” said Rick Kneipper, chief strategy officer for Anthelio Health Solutions, a Dallas-based health-care consultant. “If you ever did have a sustainable model in the health-care provider world, you really don’t anymore.”

Taking action

Bigger hospital chains with an eye toward acquisitions have already taken notice — and action in some cases. Community Health Systems, based in the health-care industry hub of Nashville, has announced 13 purchases in the past three years.

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